IFRS 17: Decision Making within an Ambiguous and Complex Environment – Variable Fee Approach and Los

IFRS 17: Decision Making within an Ambiguous and Complex Environment – Variable Fee Approach and Los


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Insurers are generally making good strides in readying themselves for IFRS 17. However, one of the pitfalls we believe companies need to avoid is making both design and accounting policy decisions based on what is perceived to be allowed by the standard rather than which choices are best or most relevant for each insurer.

So far there has been a significant focus on the methods to determine the Contractual Service Margin (CSM) under the General Measurement Model, as well as methods for locked-in interest rates and choices of coverage units. Equally important and relatively poorly understood are the roll-forward of the CSM under the Variable Fee Approach (VFA) as well as the Loss Component.

The purpose of our presentation is to explore two separate areas where key design decisions need to be made:

Calculation methods of the CSM at each subsequent measurement date under the Variable Fee Approach
Calculating the Loss Component at each subsequent measurement date

The presenters will look through these topics and make the audience aware of the consequences of their IFRS 17 design and accounting decisions. Being aware of these pitfalls will aid in making informed design decisions, help prevent unintended outcomes and will accelerate the knowledge and familiarity of those implementing the Standard.

VFA calculation methods

The requirements of the roll-forward of the VFA CSM are defined in IFRS 17 paragraph 45 and a method is demonstrated in Illustrative Example 9. However there is no clear link between the example and the wording in paragraph 45. The presenters will describe an equivalent transfer-and-cash-flow-approach to roll forward the CSM in which the model is aligned to the wording in the standard and is more intuitive to understand. They will describe the accounting implications of using each of the illustrative example and equivalent approaches.

Loss Component approach

While the definition of the creation of a Loss Component in the Standard is well understood, the requirements of the approach to rolling the Loss Component through time is principle based. The illustrative examples show one application of these principles. The presenters will explore the alternative methods of calculating the Loss Component at subsequent measurement and will explore:

The effect of using locked in vs. current rates when determining the change in estimates of fulfilment cash flows
Methods for deriving the systematic allocation of the Loss Component
Deferred acquisition cost decisions and implications thereof.

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